India's Yes Bank expects Japan's Sumitomo Mitsui Banking Corp (SMBC) to retain at least a 20% stake in the lender, but regulatory requirements may prevent it from increasing shareholding significantly beyond that, according to the bank's CEO.

SMBC announced on Friday that it had signed a definitive agreement to acquire a 20% stake in Mumbai-based Yes Bank, marking the largest cross-border merger and acquisition deal in India's financial sector.

SMBC, a subsidiary of Sumitomo Mitsui Financial Group, is Japan's second-largest bank.

"For potential capital raises in the future, SMBC would be contributing," Yes Bank CEO Prashant Kumar told Reuters on Thursday.

"It also means they (SMBC) do not want their stake to fall below 20 percent.

As part of the deal, SMBC will acquire a 13.19 percent stake from State Bank of India, its largest investor, as well as a total of 6.81 percent from other banks that rescued it following the regulator-led restructuring in March 2020.

SMBC's stake purchase fell short of the 25% shareholding required by Indian regulations, prompting an open offer from public shareholders for the remaining 26% at the same price offered to a strategic investor.

The "logical" reason why SMBC did not increase its stake in Yes Bank was most likely to avoid triggering an open offer of shares and being classified as a promoter, which carries significant regulatory obligations, Kumar said.

Large shareholders with control over a company's operations are referred to as "promoters" under Indian regulations, and being classified as such imposes stricter reporting requirements.

Kumar anticipates receiving regulatory approvals for the transaction by September.

The transaction is subject to regulatory approvals from the Reserve Bank of India, the Competition Commission of India, and the bank's shareholders.

Yes Bank shares have risen 7.5% since the announcement of the deal, and Moody's Ratings stated on Wednesday that SMBC's stake acquisition is credit positive for the Indian lender.

If a re-rating occurs, it will allow for more cost-effective fundraising and lending opportunities, according to Kumar.

He added that SMBC's focus on large corporate customers will help the bank expand into areas such as transaction banking.

However, Yes Bank will continue to focus on retail lending, which accounted for 41.2% of its loan book at the end of March.

"I don't think the retail-corporate mix will change after the transaction; we'll be more focused on retail," Kumar said.